Mea Culpa

Dissecting a position that is down big in the model portfolio, and why I am still holding

Today I want to discuss PLCE, a stock that I’ve featured in the Hidden Rock Capital Model Portfolio. I have also mentioned this name in a previous public post (Let’s Talk Retail) so wanted to open this one up for all subscribers.

Cutting to the chase, PLCE is down big today after releasing worse-than-expected Q4 guidance, as well as the fact that it is working with Centerview Partners on solutions to shore up cash.

I will dissect what this means and why I’m still holding the stock.

What Is Happening?

• PLCE guided for slightly lower revenue (1-2% lower) and much worse operating margins (negative vs. positive) in Q4 than previously expected. This was driven by a number of factors such as excessive discounting, higher-than-expected e-commerce costs (likely due to shipping & return cost overruns), and higher-than-expected inventory costs

• Company is also working with advisors such as Centerview Partners to shore up its cash position, which stands at $45M as of 2/3/2024

• In my view, management screwed up Q4 with excessive discounting, and they also need to implement a minimum order amount for free shipping to stop the bleeding in the e-commerce side. At the same time, the financials should receive a tailwind in 2024 as inventory costs decline (from lower cotton & shipping costs)

• The liquidity concerns are obviously more potentially serious, but in my view PLCE is not a company that is about to go bankrupt (solvency risk) but this is more of a near-term funding issue (liquidity risk) that was driven by the aforementioned execution mis-steps for Q4. In fact, the company has reduced its total debt by ~$130M since the 3rd quarter of 2023 which seems very far from a company headed for imminent bankruptcy!

Why I’m Holding the Stock

For those who purchased PLCE due to my recommendations, I apologize that I didn’t foresee all of the management mis-steps coming. That is part of why investing in the retail sector is difficult - the margins are razor thin, and poor management decisions can really sink the company even if secular trends and macro factors are positive!

That being said, we need to approach any buy/sell/hold decision with fresh eyes. And this is why I have decided to continue holding PLCE

• Tailwinds of lower inventory costs are coming in 2024, provided management does not continue to screw things up.

• There are relatively simple solutions PLCE can implement to cut costs such as minimum order size for free shipping, and better controlling 3rd party distribution channels like Amazon. This is perhaps something that an activist investor can easily help with (see points below).

• As mentioned above, I believe PLCE needs to generate some near-term liquidity but this is not a long-term solvency / bankruptcy risk given that the company continues to pay down its debt at a rapid clip. As such, the stock price being down by more than 50% pre-market is an over-reaction in my view.

• Private equity and activist investors have been very active in the retail sector recently, and I would not be surprised at all if we get a press release in the next few months about either a private equity acquisition bid, or an activist investor letter to management, or both.

• Based on Twitter sentiment on PLCE stock, it does seem that everyone has thrown in the towel on PLCE (and who can blame them?). So you would be buying/holding at the point of maximum pessimism.

For these various reasons, I am planning to continue holding PLCE stock, with a close eye on the exits if the situation continued to deteriorate.